China: China's New Withholding Tax Scheme: An Opportunity To Fund Expansion In China

Last Updated: 17 April 2018
Article by Jim Qiao

China's new withholding tax deferral scheme (Cai Shui [2017] No. 88) provides tax breaks for foreign companies if they directly reinvest the dividends into industries promoted by the Chinese government. Is your company eligible for the scheme?

In December 2017, China's Ministry of Finance (MOF), the State Administration of Taxation (SAT), and the National Development and Reform Commission and Ministry of Commerce (MOFCOM) jointly introduced Cai Shui [2017] No.88, which is relevant for multinational corporations (MNCs) operating in the country.

What is it and why has it been implemented?

This new enterprise income tax law provides tax breaks for foreign companies by allowing MNCs to defer paying tax on dividends from a Chinese enterprise if they directly reinvest the dividends into industries promoted by the Chinese government (and meet other necessary criteria).

The new law can be considered part of a global trend where many jurisdictions are taking steps to enhance the competitiveness of their tax systems to help attract foreign investment. The Chinese government is proactively encouraging companies to invest in middle and west China. As part of the government's strategy, companies generating large profits in China will be able to benefit from the deferral of withholding tax on those profits if they use the funds to invest in certain areas of the domestic economy.

It is essential to consider this now as profits from 2017 will provide the first opportunity for foreign companies to take advantage of these changes.

The tax deferral under Cai Shui [2017] No.88 applies to dividends from 1 January 2017 onwards. A MNC that has already paid withholding tax on dividends distributed after this date also now has a three-year window to claim a tax refund – provided that the dividends qualify for the scheme.

Is your company eligible?

A MNC is generally eligible for the withholding tax deferral scheme if it meets the following criteria:

  • The company uses the dividends for direct investment – this refers to equity investments such as injecting further capital into an existing Chinese enterprise or forming a new Chinese enterprise (invested enterprises)
  • Cash dividends are directly transferred from the distributing company's bank account into the bank account of the invested enterprise. Dividends in the form of securities should be directly transferred from the distributing company to the invested enterprise
  • The dividends are distributed directly from the accumulated earnings of the distributing company. Although Cai Shui [2017] No.88 only applies to dividends from after 1 January 2017, the earnings from which the dividends are distributed do not necessarily have to have been realised after that date
  • As mentioned earlier, the invested enterprise must be active in an industry that's encouraged by the Chinese government. 

These industries are listed in great detail in the Catalogue of Encouraged Industries for Foreign Investment, or the Catalogue of Priority Industries for Foreign Investment in Central and Western China. They include agriculture, mining, manufacturing, transport, financial services and the energy sector, amongst others.

What should you do next?

Now is the time to act. MNCs operating in China should first carefully consider whether the invested enterprise's current, and indeed planned, activities are in an encouraged/priority industry before distributing any dividends. 

You should then assess the potential benefits of applying for the new scheme. Remember that the withholding tax deferral isn't a permanent tax exemption. This means that you should therefore weigh up the possible tax benefit against the value of the time covered by the deferred tax.

It's a measure that's been designed by the Chinese government to provide an incentive for MNCs to adopt a longer-term mindset and keep their earnings in the country. It encourages foreign companies active in China to further invest in local expansion and drives the establishment of new corporate entities in the country.

How TMF Group can help

At TMF Group, we can help you to understand this tax change and check your eligibility. As a specialist in the provision of professional services for new and growing businesses, we can help you to understand the changing tax system in China and implement your growth strategy.

Our in-country experts can work with you to establish newly-invested enterprises, including the implementation and processing of payroll, accounting and tax services, and corporate secretarial services. Talk to us to find out more and discuss how we can help you to expand in the Chinese market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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